Any business that gives credit knows it has to provide for non-payment of a portion of the total amount it’s owed unless it has an absolutely flawless credit policy, but there are early warning signs that can help you know when a debtor business is heading into troubled times.
You should always do as much as possible to keep up with each customer’s ability to pay what they owe you. If their cash flow takes a hit from some unforeseen event — loss of a major customer or a production line disruption for example, they may have limited funds to apply to outstanding debts and you can wind up at the bottom of the list unless you act quickly.
The early warning signs we’ve included in this article aren’t intended to be a complete catalogue of these indicators, but it will give you a guide as to what kinds of things you should keep an eye out for.
The Classic Sign – a Change in Payment Patterns
If a customer who’s formerly been paying you 30 days suddenly extends their payments to 45 or 60 days they’d better be able to give you a reason. The same applies to delaying repayments then suddenly remitting a lump sum for the full amount, or most of it. Even changing to C.O.D. after having an account for some time is worth a query.
The Customer Starts Playing Hard to Get
When a customer changes their address, even if they give you notice of the new details, it could be an indication that they’re downsizing premises to cut costs because of financial problems. If they suddenly become hard to contact or won’t return calls, that’s another potential sign of trouble. Even something as apparently minor as switching from answering the telephone personally to having the task performed by an answering machine could have a deeper meaning.
The Check’s in the Mail but There’s Something Different
Keep an eye on who’s signing your customers’ checks. If a new signature suddenly appears on them you should find out why, especially if you don’t recognize the name. If the bank the check is drawn on changes that’s another reason to give the company a call to see what’s happening. The same goes for a business debt being paid with a personal check. It just isn’t the way things are usually done.
Keep your Eyes Open and your Ear to the Ground
What do you see when you drive by your customers’ premises? Is everything neat and tidy or are there empty shelves and dirty windows. The physical condition of your customer’s place of business can tell you a lot about how they’re going. Make it a point to share in a bit of industry gossip from time to time so you’ll pick up any rumors going around town. This includes keeping up with other suppliers of your customers and even your own sales team. What you don’t know can hurt you!
Management Plays Musical Chairs
If a company’s CEO quits or there’s a big shakeup in senior management or the board of directors it could be because the business is in financial straits and rats are deserting the sinking ship. If these changes happen suddenly, especially if they’re unannounced beforehand, you should be particularly suspicious.
Personality Problems Emerge
Most of our business relationships these days are electronic or paper-based and little personal interaction with customers takes place. Unfortunately this means you could miss the personality changes among a customer’s team members that are caused by the stress of dealing with fiscal failures. Keep in touch with customers on a personal basis and you’ll be in a position to notice such things.
As we’ve said, none of these warning signs is necessarily proof that a business is having problems that will affect its ability to pay you. They are a good reason to get on the phone immediately and have a talk with the other business owner that runs along the lines of: “I’ve just noticed that this is happening and was wondering if there’s anything you might need from us”.
When you’ve heard their response you then have a decision to make about extending further credit or beginning your own collection efforts. If the answers are too glib or the reasons for whatever’s happening don’t make sense you may well have picked up an early warning sign of a customer’s problems.
If you feel the problem isn’t terminal and you want to retain their custom you’ll need to negotiate some terms that will ease the financial pressures on your customer while at the same time ensuring that payments continue to be made, even if at a reduced rate.
If on the other hand your customer is about to go under, there’s little point in trying to be gentle with the solution and every reason to go into collection mode without further delay. Once a customer’s business goes under it’s likely to take everything it owes you with it.
Copyright 2005, RAN ONE Inc. All rights reserved. Reprinted with permission from www.ranone.com.